A ‘Robin Hood’ tax is no way to redistribute

“José Manuel Barroso, European Commission president, has proposed a tax on financial transactions to help rebuild public finances across the bloc, calling it a matter of fairness.”

What’s this all about?

The idea is that every time money changes hands in the City, the state takes a sliver. No one in the City really notices, the tax revenue is huge and the government’s financial problems are solved. Even better, the tax reduces speculation and so makes the banking system safer.

Wow. Sounds great!

Doesn’t it, though?

What’s the catch?

There’s no catch.

Really?

Don’t be daft. Of course there’s a catch. Imagine a non-financial transaction tax: every time anyone receives a payment, they must pay £5. No big deal if you’re selling a house but quite a big deal if you’re selling a packet of chewing gum.

But the FTT is a percentage, isn’t it?

True, this isn’t a precise analogy to the FTT, but it’s worth exploring. My tax would discourage small transactions while the FTT would discourage short-term transactions. The obvious response to my tax would be to pool transactions: you’d want to be paid quarterly rather than weekly. You’d do big shopping trips, not impulse buys. Similarly the FTT encourages – say – lending $1m for a year rather than for a day, 365 times.

Either tax discourages certain transactions.

For James Tobin, the late Nobel laureate economist who first proposed the tax, that was the whole point. He expected short-term deals to dry up, so the tax was a bad source of revenue. But he thought that this would enhance financial stability.

Would it?

Maybe, but probably not. Certainly it would have done nothing to prevent the current crisis. Most of the patchy empirical evidence – collated by the Institute of Development Studies – suggests that as transactions evaporate, volatility increases. Purchases get lumpier and people only trade in response to large price movements – besides trying to avoid the tax with accounting tricks: imagine transactions being lumped together, netted off, moved offshore or removed from exchanges. If I had to pay a £1 tax on every real-world transaction, the first thing I’d want to do is set up some kind of slate with my corner shop so that we only “transacted” every three months, even if I popped in for milk and a copy of the FT every morning. Traders could get very cute about this, and none of that is likely to make the financial system robust and stable.

Still, it’s a tiny tax that would raise a huge amount of money, isn’t it?

Tiny or huge? Make up your mind. If you’re trading the same stuff backwards and forwards a hundred times a day and the government takes 0.01 per cent of each trade, then you’ve lost about 1 per cent in a day. That’s not tiny. Mr Barroso reckons he could raise €55bn a year, which is very roughly 10 per cent of global banking profits.
And the problem that is that the banks are too weak to pay.

No. The problem is the banks aren’t likely to be the ones who pay the tax. If it was a tax on bank profits it would hit bank shareholders, such as governments and pension funds.

But it’s not a tax on profits, it’s a tax on transactions, and we have no idea who will end up paying it. Tax incidence is tricky: some taxes can be passed on to customers, others will end up hitting shareholders. It’s reasonable to assume that in the end the FTT would be mildly progressive – assuming the tax doesn’t just drive huge chunks of the financial sector offshore.

Is that likely?

Moving trades from London to New York is hardly beyond the scope of human ingenuity. Curiously, the European Commission itself reckons the tax will destroy derivatives trading in the European Union, reducing it by at least two thirds and possibly by nine tenths, and lowering GDP by 1.75 per cent, or more than €200bn.

Gosh.

At least Mr Barroso isn’t planning to invade Poland.

But I thought this tax was also called a Robin Hood tax – rob from the rich, give to the poor?

We do have other ways to take money from the rich and give it to the poor – income tax, capital gains tax, that sort of thing. We could even tax banking profits or bankers’ pay directly.

But the FTT is a baffling way to try to redistribute, and Tobin didn’t endorse that use of the tax. And Robin Hood himself was a determined campaigner against erratic taxation.

In what way is “trading the same stuff backwards and forwards a hundred times a day” useful to anyone other than the bankers seeking to make a fast buck? Does it really matter where the greedy gits are located?

Anyone been to Shanghai lately? Europe won’t only be sending London businesses to New York, they will be sending their own as well – to Shanghai, Hong Kong, Canada, Australia, Singapore – take your pick. In history’s books, Europe has shot itself in the foot before, and now their politicians are planning on self destructing – again.

I drew attention to this blog in a forum. One of the contributors posted the following:
We already HAVE a tax on transactions – it is called stamp duty

Now the Tobin tax would apply to a wider pool of trnsactions, but forgive me if I am dubiuous: the bad effects Mr Harford predicts should already be visible on share dealing (reduced liquidity, lumpy pricing)

And, of course, we have all see how share dealing left City of London in 1703 after stamp duty weas introduced to go to the financial centre of Ulan Bator…

Oh, wait, you mean the facts are that it didn’t?

That is the problem with economists: why let pesky facts spoil a lovely theory. Mr Harford has a lovely theory – pity that facts show he is talking cobblers.

If a amrket works with a transaction tax on one assert class, then a sensible discussion needs to explain why it is OK for A, but would be different for B. If all you do is say it is broken (and ignore that you already do it on A) then you are not doing an honest analysis.

Yes, London equity markets are liquid despite the presence of stamp duty. But as Tim points out, banks and hedge funds will find ways to get round it. Many do not take physical delivery of stock, precisely so they can avoid stamp duty. Instead, they buy Contracts for Difference (CFDs), for which no stamp duty is payable.

I don’t think Tim is making any concrete forecasts about what will happen, he’s just highlighting some of the difficulties involved in implementing such a tax. I don’t think your chippy tone is really warranted either, the answer to this isn’t obvious. In fact, virtually nothing is as obvious as you seem to think this problem is. There will be complications, that’s all this piece is pointing out.

Stuart – market makers in banks are exempt from stamp duty so your ‘argument’ falls down there.
Further, markets were clearly less liquid and mobile in the C18 – although I guess you probably knew that as your post smacks of facetiousness slightly more than stupidity – so your other point is no more telling.

As the article concludes, if it’s so important to tax the banks then it would be a lot more efficient to do so via a super-tax on their profits.

But if the tax is a percentage, then it doesn’t matter if you do one big transaction or lots of small ones. So your instability argument kind of falls apart. What this would do is wipe out very low margin trading (making small arbitrage opportunities harder to get) and reduce very short term trading (some of the much maligned HFT).

I don’t particularly think either of these are important goals to pursue, but if Barroso does, his tax is more effective than you give credit.